BY MELODY CHIKONO
LACK of foreign currency-based instruments is posing serious challenges to pension funds as they fail to pay claims in the relative currency in which the policy was written in the face of policy inconsistencies thereby shortchanging pensioners of their hard-earned cash when claims fall due, it has emerged.
Pensions, just like insurance, are supposed to sweat their cash before claims come up, but in the absence of the instruments, this becomes an uphill task.
Often the mismatch between their assets and their liabilities have left pensioners bleeding, exposed to unfair value of their investments.
In Zimbabwe, this has been the case at a time the industry is battling confidence issues arising from legacy issues from the 2009 hyperinflation era.
For the second time in 2019, pensioners lost millions of dollars through currency change policies that saw the government scrapping the use of the multi-currency systems.
While the guidance paper produced by the Insurance and Pensions Commission (Ipec) on how to administer currency changes resulted in pensions and bonus increases, a survey done by the Zimbabwe Independent shows that policyholders are getting their claims paid in local currency for contributions made prior to currency shifts in 2019 despite them having been contribution in real terms.
This has left many policyholders failing to reap the benefits of their hard labour.
This is also coming at a time when the industry has been allowed to underwrite policies in United States dollars following governments’ move to allow the use of free funds last year, but the people have remained sceptical for fear of losing their money once again.
Experts believe that when the environment is uncertain there is a difference in what one may think is the return on an asset while interest rates change may have a very big impact on the valuation status of a fund.
Actuarial and investments research consultant Taonaziso Chowa told the Independent that the monetary policy has impacted a lot on the matched asset-liability book calling for a relook into the industry’s models.
“Forex-based instruments could help a lot and could give us a definite match in terms of the currency side. However, developing countries have some of the highest interest rates in the world so it comes to say when you look at this solution how does it work? You will realise that after the 2009 hyperinflation era the values of the stock market had gone back to US dollar equivalent after two years,” Chowa said.
“We thus need to see how long it takes to realise value on a cover. Sometimes you might be better off placing a moratorium on a cover withdrawals or payment of benefits. We can have a government side paying what is due now and when we have seen that this portfolio has fully recovered, it can then be accessible. The stock market, yes, the property sector, yes, but the property in terms of returns has issues of voids depending on how prime your investment decision-making is.
“So, when you look at the issue of hedged promises, arrangements can be made to deliver on a promise and not really money or its equivalent. So I think we have been focusing more on financial delivery and I think it’s time for us to relook our models and deliver on hedged promises.”
But Ipec is pinning its hope on the Pensions Bill, which is now before parliament, which provides for offshore investments for pension funds.
Last week Ipec commissioner Grace Muradzikwa challenged the sector to match their assets and their liabilities to ensure that pensioners get value for their money.
“It is not complicated for short-term insurance because usually someone takes out a policy for a year and it’s renewable. Some are quarterly whether you are incepting the policy in US dollars or RTGS. But pensions are long-term. That is what we are putting as a challenge to say the absence of US dollar instruments, where in the main it’s sitting in nostro accounts, is not allowing insurance companies to sweat this cash,” Muradzikwa said.
“This is because the sector works in a way that allows companies to sweat the cash before claims occur. These funds are sitting in nostro balances, but our expectations are that they are ring-fenced so that they remain available when claims come up.”
Ipec director of pensions Cuthbert Munjoma said there is need to match assets and the liabilities to make reasonable expectations of members.
“This is actually a requirement of Statutory Instrument 28 of 2020 that the moment you collect pension in US dollars, you need to invest it in matching assets so that you will be able to meet obligations as they fall due. It is critical that the lack of adequate matching assets that are denominated in foreign currency be addressed,” Munjoma said.
We hope that the matching asset classes such as the Victoria Falls Stock Exchange would actually provide an alternative investment class. It is also important to note that the Pensions Bill which is before parliament at second reading stage provides for offshore investments. We believe that will go a long way in ensuring that there is more available asset classes.”
Should pension funds be allowed to invest offshore and also take time to invest in asset classes that match assets and liabilities, the regulator believes that issues to do the sovereign risk can easily be managed.